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ECON1101

3RD
ASSIGNMENT:

HAND-IN

Question 1a) (0.5 marks)
Answer: D
Question 1b) (0.5 marks)
Answer: A
Question 2a) (0.5 marks)
Answer: B
Question 2b) (0.5 marks)
Answer: C
Question 3: (1 mark)
Consider a market whose supply and demand curves are given by:
Supply: P = 4Qs
Demand: P = 12-2Qd
a) How will the equilibrium price and quantity in this market be affected if a $6
per unit tax is imposed on sellers? What is the price received by sellers?
(0.3points)
Without tax:
Supply: P = 4Qs Demand: P = 12-2Qd
Equilibrium quantity & price:
4QS= 12- 2QD
substitute
into
:
4Q = 12- 2Q
P= (4 x 2)
6Q = 12
P*= $8
Q * = 2 units
With tax:
Supply: P- 6= 4QS
P= 4QS + 6
Equilibrium quantity & price:
4QS + 6 = 12 – 2QD
into
:
4Q + 6 = 12 – 2Q
6Q = 6
Q*= 1 unit

substitute
P= (4 x 1) + 6
P *= $10

Therefore, after the $6 per unit tax is imposed on sellers, the equilibrium price and quantity
increases by $2 and decreases by 1 unit, respectively. The price received by sellers is $4.
b) Given the new quantity produced and sold, calculate consumer surplus,
producer surplus and the tax revenue. Then work out the total economic
surplus. (0.5 points)
Consumer surplus= ½ x 1 x (12-10)
= $1
Producer surplus= ½ x 4 x 1
= $2
Total economic surplus= consumer surplus + producer surplus + tax revenue

to earn abnormal profits from higher prices in the short run. it cannot sell one more unit. Similarly.000 when he “cuts price” and Bugle “maintains price” . it has a downward sloping MR curve. Receives the highest profit of $90. However. However. without reducing the price on all units. no matter what Clarion does. Receives the highest profit of $96. in a perfectly competitive market. as a monopolist is the only firm in the market. It will still produce where MR=MC. hence we would then expect Bugle to select that strategy. thus maximising profits at the point where P=MC. whereas the monopolist is a price setter that must consider the tradeoff between price and quantity demanded. by choosing “cut price” he can receive either the highest profit or the third highest profit. monopolist produces smaller output and charges a higher price relative to what would be produced in a perfectly competitive market. whereas choosing “maintain price” would make him receive either the second highest profit or the fourth highest profit. Hence in the short run. (0. Receives the third highest profit of $54. consider the decision Clarion faces: 5. hence allowing the monopoly to generate excess profits. but the price will be higher at this level. thus maximising profits at the output where P>MC and the marginal benefit to society from another unit produced exceeds the marginal cost to society. thus it produces at an output where marginal cost equals the market price (P=MR=MC). the monopolist needs to produce a smaller output than what is considered socially optimal. But. clearly Bugle has a dominant strategy: “cut price” is always preferred.000 when he “maintains price” and Clarion “cuts price” Therefore. Receives the fourth highest profit of $36. Consider the decision Bugle faces: 1. (0. however as the monopolist has a downward sloping demand curve.= $1 + $2 + $6 = $9 Tax revenue= 1 x (10-4) = $6 c) Calculate the deadweight loss of the tax. Hence. for a monopolist the MR < unit price. irrespective of the strategy selected by the other players. the MR= unit price. Therefore.000 when he “cuts price” and Clarion “cuts price” 4.2 points) Deadweight loss= [½ x (2-1) x (8-4)] + [½ x (2-1) x (10-8)] = $2 + $1 = $3 Question 4: Consider a monopolist that cannot engage in any kind of price discrimination.000 when he “cuts price” and Clarion “maintains price” 2. Question 5: What is (a) the dominant strategy for Bugle and Clarion? Explain. Why does the monopolist produce a smaller output and charge a higher price than it would prevail if the industry were perfectly competitive? (1 mark) A perfectly competitive firm has a flat MR curve which is equal to the market price. Receives the second highest profit of $66. the perfect competitor is a price taker who cannot affect market price.5 points) The dominant strategy represents a strategy that is preferred by a player.000 when he “maintains price” and Clarion “maintains price” 3. Thus. The perfect competitor can sell one more unit without reducing price on all of the other units it attempting to sell.

6.” Therefore. Now consider whether Clarion would prefer to change his strategy given that Bugle chooses “cut price.5points) From the previous question we received a dominant strategy for both players of “cut price”. by choosing “cut price” he can receive either the highest profit or the third highest profit.000.000 and $30. Bugle has no unilateral incentive to change his strategy.000 and $36. the strategy profile is a Nash Equilibrium of (cut price. Clarion has no unilateral incentive to change his strategy. Now consider whether Bugle would prefer to change his strategy given that Clarion chooses “cut price.” Therefore. (0. hence we would then expect Clarion to select that strategy. whereas choosing “maintain price” would make him receive either the second highest profit or the fourth highest profit. Receives the fourth highest profit of $30.000 when he “maintains price” and Bugle “maintains price” 7. . if Bugle chooses “cut price. clearly Clarion has a dominant strategy: “cut price” is always preferred. respectively. Bugle would earn the higher profit of $54. where he would receive $54.000 when he “maintains price” and Bugle “cuts price” Therefore. no matter what Bugle does. Receives the second highest profit of $72. Therefore.000 when he “cuts price” and Bugle “cuts price” 8.000.” Therefore.” Therefore.” Clarion has either the choice of “cut price” or “maintain price”. where he would receive $42. cut price). (b) The Nash equilibrium of this game? Explain.000 if he chooses “cut price” when Bugle chooses “cut price.” Bugle has either the choice of “cut price” or “maintain price”. respectively.000 if he chooses “cut price” when Clarion chooses “cut price. as no player can benefit from unilaterally changing their strategy. Clarion would earn the higher profit of $42. Receives the third highest profit of $42. Hence. if Clarion chooses “cut price.